The question: I lost U.S. citizenship years ago. Can the U.S. still tax me?

Nothing paralyzes a relinquished expat more than the notion of having their citizenship “restored” automatically (without their consent). For those who relinquished decades ago but who do not have CLN’s, this is becoming a major issue. How incredibly frustrating to have been warned/admonished decades ago by consular staff who failed to include the information that one “perhaps should” appear at the consulate, file forms and get a CLN. In fact, under the INA (“Immigration and Nationality Act“), neither notification NOR a CLN was required to relinquish U.S. citizenship. And in the same spirit of the government’s complete lack in taking responsibility for due diligence in advising of tax and reporting requirements before the hideous spectacle of OVDP/OVDI, once again we are the ones bearing the brunt of the problem. As usual Americans abroad are faced with both (1) “ignorance” of the law because they never knew or heard about it AND (2) Ignorance of the law because the law cannot be understood.

(1) Ignorance of the law because nobody ever heard about the law: As far as “ignorance of the law is no excuse,” have a listen to this short, incredibly simple and completely clear explanation of why the government should not get away with this. Really, can the U.S. take away the “Stop Sign” and then fine people for not stopping?

About the “Exit Tax” (S. 877A rules) – Do the rules apply prospectively only from June 16, 2008? Do they apply retrospectively to those who relinquished U.S. citizenship by becoming Canadian citizens in the 1970s?

The statute itself is said to be poorly written. Both sides of the fence can be quoted as saying it is/isn’t retroactive by the “plain language” of the statute. This is extremely confusing and unsettling; how is one to know who to believe? Is there even an answer to this important question?

Since Treasury/IRS have not, at this point, chosen to offer guidance, we are left with many very competent lawyers who do not read the statute in the same way. As long as the IRS remains quiet on these issues, the ways in which these advisers lead their clients become a secondary way of “making the law.” The longer the IRS is silent, the more the law is “established” by the compliance industry. (And this now includes the banks, who have no business being the arbiters of U.S. indicia determining U.S. Person-hood (or not)). The question then becomes, why should one point of view be any more (or less) compelling than another? There are many different perspectives on this issue. Why should one point of view be preferred to another?

As Homelander_NOT formulates the question:

A major concern is that people who relinquished their citizenship decades ago are being told they must formally renounce at a consulate, they must file taxes and so on. The same thing is happening with “border babies” and other types of “Accidental Americans.” The fact is, citizenship law is complex. What is true for someone renouncing today is not necessarily the same for people who have a different situation outside of simple dual-citizenship. And yet, if you read what the compliance industry is saying, this is “it” – you must become compliant, file 8854 and pay that outrageous $2350.

So, what do the lawyers suggest? Remember that the law is NOT clear and these are the perspectives of the individual lawyer.

The S. 877A “Exit Tax” rules took effect in June 2008. Could they really be understood to apply to people who relinquished U.S. citizenship before the “Exit Tax” rules even existed? Some lawyers say “YES.” Some lawyers say “NO.” Some lawyers say “NOT SURE.” Some lawyers say: “What? I don’t understand the question.”

“Fools jump in where angels fear to tread”

Few lawyers have demonstrated the courage to address this issue at all. Recently, the lawyers mentioned in this post have put forth their ideas on the subject. The difficulties involved in understanding the complexities can lead to quite a state/level of uncertainty. It is only natural to feel fearful when something is not grasped. It must be remembered that at this point NO ONE“knows.” Each person has to take responsibility for making the effort to become familiar with all the information out there and apply it to his/her situation as best one can before making a decision/taking action/going with any particular adviser. Ask your adviser why he/she interprets the S. 877A rules in the way that they do. Remember, that your choice of adviser will help shape the law! After you have read these points of view, please vote in the poll at the bottom of this post.

There appear to be at least three different perspectives:

1. No, the S. 877A “Exit Tax” rules do NOT have retroactive application because they cannot be reasonably interpreted to mean that they have retroactive application.

2. No, the S. 877A “Exit Tax” rules do NOT have retroactive application because the “plain language” of S. 877A says they they do NOT.

3. Yes, the S. 877A “Exit Tax” rules DO have retroactive application because the “plain language” of S. 877A says that they do.

Exercise: Can you decide which lawyers have which perspectives? You will probably have to read their individual posts/articles to fully understand their position. Some may have more than one perspective. Check your answers at the end of this post.

The interpretation of “retroactive confiscation” includes the following three fantastic assumptions: 1. Fantastic – The idea that the U.S. Congress (remember that’s where the law comes from) intended to retroactively confiscate the retirement assets of former U.S. citizens (living outside the United States) is fantastic. 2. More Fantastic – The idea that the retroactive confiscation of wealth could have been intendedwithout that specific intention clearly conveyed in the statute (which was buried in a section of the “HEART Act”) is more fantastic. 3. Most Fantastic – The idea that a former U.S. “citizen” should have to consult a lawyer to determine whether the law (which nobody would even imagine exists) should be interpreted as confiscation of (“post U.S. “Citizen”) assets is the most fantastic.

Today’s Part III of the post also sets forth the premise that the manner in which legal professionals interpret a particular law will impact how that law is interpreted by other professionals, which in turn will help shape the future evolution of that law. With that as the touchstone, prudence is advised when it comes to interpreting the backward reach of the relevant Internal Revenue Code Sections — Section 877A and 7701(a)(50). Caution is necessary lest the tax professionals, themselves, create a situation where one professional blindly follows the next resulting in a scenario where, without the requisite aforethought and due consideration, the provisions come to be applied retroactively.

For persons whose CLN shows a loss of citizenship date that is on or before June 3, 2004, section 877A should not apply. Even if the CLN is received today. I’ve discussed this with people at the IRS and they’ve informally stated that they agree.
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Furthermore, since the 2004 Act quite deliberately included a “grandfather rule” for individuals who expatriated (within the general meaning of that term) on or prior to June 3, 2004, it’s extraordinarily difficult to imagine that the 2008 Act would have been intended to reverse that treatment.

Under a literal interpretation of current law Mr. Maple Leaf’s U.S. citizenship is terminated for nationality purposes in 1981. However under HEART, termination of his U.S. citizenship for tax purposes is determined under section 7701(a)(50)(A), which sends us to section 877A(g)(4). Under section 877A(g)(4), Mr. Maple Leaf’s U.S. citizenship is lost on the earlier of: 1. The date in 2015 on which he submitted a statement that confirmed a prior expatriating act (i.e., becoming naturalized in and formally declaring allegiance to Canada); or 2. The date in 2016 on which his CLN was issued. Because his submission to the Department of State antedated the issuance of the CLN, his tax-citizenship terminated in 2015. Thus, Mr. Maple Leaf is liable for tax and reporting obligations from 1981 through 2015. Further, since Mr. Maple Leaf and the Department of State did not concurrently consider his U.S. citizenship to have terminated, he will not be relieved of tax obligations under D’Hotelle de Benitez Rexach or Revenue Ruling 92-109 until 2015.

Okay, you have had the opportunity to read what various lawyers say when they WRITE in a non-interactive way. Interestingly, a recent interactive DISCUSSION on this topic took place on a blog between three of the lawyers mentioned above. The discussion demonstrates the total lack of agreement. You can read the comments here. What do you think?

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Possible answers to which lawyers have which perspectives?

1. No, the S. 877A “Exit Tax” rules do NOT have retroactive application because they cannot be reasonably interpreted to mean that they have retroactive application.

Michael Miller, Virginia La Torre Jeker, John Richardson

2. No, the S. 877A “Exit Tax” rules do NOT have retroactive application because the “plain language” of S. 877A says they they do NOT.

Virginia La Torre Jeker, John Richardson

3. Yes, the S. 877A “Exit Tax” rules DO have retroactive application because the “plain language” of S. 877A says that they do.

What do you think? Do you see how the interpretation of the S. 877A rules can be seen as both the “young woman” and the “old woman”?

The message is: Caution is warranted!

You should take whatever step (or not) that you are most comfortable with. The interpretations of the lawyers/accountants, etc. are just that – their own interpretations. Hopefully, the IRS will answer the American Bar Association. Till then: Good luck. You are in uncharted terrain.

…
Adding insult to injury, the IRS has two different non-residency requirements: one for U.S. citizens or green card holders, and the other for non-U.S. citizens, non-green card holders. The non-residency requirement applicable to U.S. citizens or green card holders is relevant to the streamlined procedures for snowbirds, while the non-residency requirement for non-U.S. citizens, non-green card holders is much more humane and does not exacerbate the dilemma created by the other version of the non-residing requirement.
…

After briefly summarizing some relevant general rules regarding streamlined, this blog will address the consequences of that FAQ for snowbirds who have not filed during the three-year period for which tax returns must be submitted under streamlined and, according to the IRS, spend too much time in the United States. Ultimately, these snowbirds are ineligible for streamlined and must find an alternative way to catch-up with their U.S. tax filing obligations.

…

Conclusion

As the example above illustrates, the IRS’s position on a snowbird’s eligibility for streamlined is rather ominous. Does physical presence exceeding 35 days every year justify the disqualification of noncompliant taxpayers who have spent relatively small amounts of time in the United States every year from streamlined—both the resident and nonresident flavors of the program—and the imposition of a 27.5% (or 50%) penalty under OVDP? That seems to be a draconian result, especially for taxpayers who spend two months or less in the United States every year.

This result certainly will not encourage compliance and is inconsistent with IRS Commissioner Koskinen’s rationale for expanding the streamlined program and the significant tightening of OVDP.

….also informing them that there is no actual precedent based upon judgement to support them doing so

I have been thinking about this. I cannot recall seeing any reports nor hearing of a single case of the IRS deeming a non-CLN holding relinquisher as delinquent in taxes back to the date of relinquishment. One might think, after over three years of involvement in this issue, that if there were one, it would have surfaced by now. What I definitely know we have heard, is of many minnows entering OVDP/OVDI, being assessed ridiculous fines; many people becoming compliant so they can renounce and so on. And most definitely we know of cases where in spite of having relinquished decades ago, they were advised to file, & pay penalties in order to get CLNs.Some at very high costs.

So perhaps it really is quite true; it is not the US govt who is stating anything regarding retroactive application of law, nor the necessity of obtaining a CLN.

If the IRS does not give a clear ruling regarding retroactivity , how should we view this going forward? What should we say to those who come here looking for help?

OR, let’s say the IRS indicates retroactivity is the law (presuming that really WAS the intent of the Congress). I wonder how many more people would simply make the decision to do whatever it takes to stay under the radar. How could anyone in their retirement years be expected to commit financial suicide and for what?

OR, the IRS indicates retroactivity is NOT the law. What happens to all those people who are paying thousands as advised by those who claim that is the only way to be sure? Are they not at all liable for how they direct clients (wrongly)? After all, if it is the delinquent taxpayer at fault, we hear “ignorance of the law is no excuse.” What about the lawyers and accountants? Would they automatically be granted the benefit of the doubt as to motive? Would they get to keep all that money (which I am sure would total far more than any amount of tax owed by non-wilful or even wilful non-filers excluding those homelanders who ARE evading tax via non-US accounts)?

The US, or the IRS won’t have any choice but to declare an undeclared amnesty.

Lately I’ve been thinking about that USP radio person in Canada who interviewed WhiteKat I believe. He said he’d filed every year but wrote “income earned in Canada only” across his 1040. Why would the IRS ignore this unless there was wilful blindness on the part of the IRS when it came to non-residents?

Sometimes ambiguity and silence can be more eloquent than clear words.

Rooboy is right. The IRS cannot issue formal guidance to people that runs contrary to what the statutes Congress presents to them say.

But they can act contrary to those statutes provided nobody catches on and they never say by a ruling or by formal guidance that is what they are doing.

So maybe the ambiguity in what the IRS is saying and doing about those who relinquished pre-2004 is quite deliberate.

If as a pre-2004 relinqiusher you proceed to get a CLN and then act as though you are out for both citizenship and taxation, then you are out, no questions asked.

But if you don’t get a CLN, or do and go for compliance, thereby tacitly consenting that all along you have been in, they’ll take you, no questions asked.
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The opening instructions to US Form 8854 serve to illustrate. Initially, they appear maddeningly ambiguous.http://www.irs.gov/pub/irs-pdf/i8854.pdf
But maybe the opening ambiguity is deliberate on the part of the IRS. When read one way, the ambiguity allows the IRS to assure Congress they are implementing the letter of the legislation. But when read the other way, it lets pre-2004 relinquishers off the hook with a sly wink.

“2014 Instructions for Form 8854
Purpose of Form
Form 8854 is used by individuals who have expatriated on or after June 4, 2004.”

Full stop, wink wink. If you relinquished (expatriated) before that date, this form is not for you. Throw it in the garbage can. For those who grasp that there is a full stop, right there is the clandestine offer by the IRS of a get-out-of-tax-jail-free card.

It is only if you read on and overlook the full stop that the instructions (seemingly) get muddy for the pre-2004 relinquisher. But perhaps the ambiguity as to whether the convoluted post-2004/2008 expatriation provisions that follow apply is deliberate to protect the IRS’s rear end in case some agent of Congress starts to get suspicious about how the IRS is letting that group off the hook. “Include them? Yessiree, sir, that’s what we meant by all that expatriation date stuff. It’s all there, exactly like the legislation says.”

And the poor pre-2004 sods who get mired by reading the instructions too far (blah blah expatriation date) fall into the clutches of the likes of Roy Berg, and both Berg and the IRS are only too happy take them, no questions asked.

It must be said. If you relinquished pre-2004, in the way the 8854 instructions are deliberately ambiguously written, maybe the IRS is your friend… if you heed their full stop.

Homelanders may have lived outside of the US then went back to the US not realizing that they should have gotten rid of all. Some may have kept their places where they lived, investments, pensions or banking in foreign land… they thought the same thing I did… money not made in the US so why is it taxed by the US, its taxed in foreign country… the ones I spoke to were exactly like me… didn’t know jack about taxes… in the yrs they were out of the US… they didn’t pay US taxes, only taxes where it was made… never even dawned on them to do so… when I spoke to them about this… they were horrified… They could cash out on some & bring into the US… but then they compound their problem… tax evasion… now get this one… money laundering also… the fines could wipe out a large chunk of their money made… they are stuck in a corner… same corner some of my US family are in like me… joint on accounts with family members who uses their US address… elders’ version of estate planning… who thought using a US address would cause a big problem… money has been taxed already… When people throw around the words tax evasion… each story is different… not one of us is rich… we can all honestly say… we didn’t know jack about CBT or taxes… I find it amazing as a GC holder… we are treated like citizens without votes or representation… if we have problems.. US is the first to say… can’t help u so go to your home country embassy but give me all your money first…

Re: from the main post: “How incredibly frustrating to have been warned/admonished decades ago by consular staff who failed to include the information that one “perhaps should” appear at the consulate, file forms and get a CLN.”

In fact, consular staff were/are legally obligated under the INA to proactively investigate and report to State any time they suspected loss of nationality. If their reports were/are approved by State, they were to forward CLNs to the person in question.

Understanding that consular staff failed to follow the law back then can be even more galling today than musing on how they failed to make a suggestion.

I brought up the case of the radio interviewer because it highlights the IRS’s unofficial policy of ignoring non-resident US persons. The IRS should have not accepted a tax return written in such a way and should contacted the taxpayer to correct it. This unwritten policy probably came about in recognition of the fact that US taxation is next to impossible to enforce extraterritorially. We can say that up until now, tax compliance in non-residents has been truly voluntary, as the IRS has done little if nothing to enforce it – perhaps even to the extent that they can be accused of actually condoning non-compliance in non-residents and snowbirds.

Comments made in Gwen and Ginny’s lawsuit suggest that IRS letters out of the blue will cause panic in non-residents living in Canada, and for good reason considering the IRS’s past behaviour of ignoring us. Also important to note here is that these letters won’t come about from any change in behaviour on the part of the account holder, only in Canadian banks (the facilitators). This self-serving behaviour disgusts me, and it disgusts me even more after learning that the Canadian government gave OUR BANKS free reign to persecute American Citizens by intentionally removing the US written non-discrimination clause from the Canadian IGA:

Although the paper is not accurate in some respects (bank accounts are not being closed and mortgages are not being cancelled or not renewed here as we do see in Europe), it is encouraging that some law students are choosing this subject to analyze and write papers on.

It was from the start, to me, all about discrimination by national origin – and, of course, that some can be entrapped to stay in the system – financially and by lack of capacity, as the US exceptionally determines it has a right to maintain its tax by citizenship when the rest of the world taxes by residency. Some Congress persons should have realized this, and perhaps the Senate Finance Committee will, and determine this is not what the US should be doing to those it deems *its own people*. If it does not – why? We are just another sorely needed cash cow.

In the meantime, yes, we have been betrayed by our own Canadian government as they tripped over each other to bow to the U.S. omnibus legislation passed by punitive greedy legislators in the US, buried in the US HIRE Bill — by in turn burying the implementation of the signed IGA (signed behind closed doors with the US) to bring FATCA law to Canada. There was NO regard for the discrimination by national origin, our rights — the rights of all Canadians’ under the Charter of Rights and Freedoms. Their rush to aid the lobbying Canadian financial institutions over rights of a large segment of ordinary Canadians (the number not important if even one). My second most angry moment was when Mr. Flaherty suggested that US citizens in Canada need to talk to the US about their problems — he was part of the Canadian government that allowed US laws to override Canadian laws and the sovereignty of this country.

Letters out of the blue to all of us who have lived in oblivion — yes, it will create panic just as when each of us had our OMG moment.

I was ignored for decades after being warned in 1975 that I would lose my US citizenship by becoming a Canadian citizen. I was also ignored at the border countless times in visits back and forth to visit family (which I haven’t felt safe to do with my son to also visit family for now over four years). Does that ignoring of us by the US not have some precedence in this? I cannot express enough to anyone how incensed I was to learn from my own daughter that I was considered a US citizen and should have been filing US tax returns all these years. I have NEVER, NEVER been so angry that would be the case when I had lived most of my adult life as a Canadian and when I had crossed the border numerous times with no advice that doing so was a crime as border officials looked at my Canadian passport with a US place of birth — until that fateful day when it did make a difference. I have had to redirect that anger into action here as my daughter now places guilt upon herself for having been the one to tell me *the facts of my US life* — she did not forget my rage.

Part IV recommends that
…(3) the United Nations’ Human Rights Committee should find that Canada’s FATCA, absent anti-discrimination protections, violates the ICCPR.

Finally, the Comment concludes that Canada’s FATCA (IGA), as it is currently set forth, violates the ICCPR because it does not effectively guarantee protection from discrimination.

Yes, discrimination of many for lack of a spine of the Conservative government in protecting its people first.

I think some are missing the point of this law article by Yvonne Woldeab. READ the article.
She cares not one whit about thr rights of Canadians or duals under the IGA. She is only concerned with the plight of Americans who might not be able to open an account here. She thinks this is against the UN charter of rights for Americans. My god! How narrow minded. How jingoistic. How ethnocentric! Give me a break.

@ Duke of Devon
I concur. I wrote over at the ADCS Sovereignty site that this paper was too focused on healing one small boo-boo (potential lack of banking access) which still leaves 90% or more of the FATCA/CBT wound still festering.

@calgary411 I became compliant via what I believe was the first version of the Streamlined Procedure in 2012 without professional assistance (thank goodness). In my cover letter I acknowledged that I had known of the requirement to file tax returns annually and had done so when I first emigrated 40+ years before. When the IRS stopped sending me a blank return every year or any other communication for that matter, I stopped filing returns when I had no U.S income and would not have owed any taxes because it seemed the requirement was a technicality that was not being enforced. (Yes that’s actually what I said to them). I did file when I had U.S. income one year but even then did not owe any money. They accepted me into the Streamlined Procedure and told me no further action on my part was required. I take that as tacit agreement they were not actively enforcing CBT on non-residents. I can only imagine how much becoming compliant might have cost me, if I had sought professional assistance.

Thanks for your comment, RLee. (My compliance ended up being for years 2005 – 2012, my year of renunciation — and I paid dearly, using three cross-border firms before it was done correctly regarding my son’s Canadian Registered Disability Savings Plan. Part of my costs were also for an immigration/nationality lawyer based in Washington, DC, regarding how it would be possible for my son to renounce – he cannot for any amount of money paid to any US taw law and accounting or US immigration/nationality firm.)

Roy Berg pointed out to me earlier today that the IRS has added this issue to their priority guidance plan. On the other hand, I have heard (earlier today as well) that they’re seriously considering our request for (favorable) guidance but have not made a decision. Perhaps the former is more recent and the latter is out of date. Or perhaps they’re simply leaning towards issuing the guidance. I do not know. But at a minimum, I’d say it’s an encouraging sign.

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